European banks

[John Hjorth]

Danske is now at 167 DKK, down from 212 at the start of this thread on uncertainty on money laundering.

 

Starting to look cheap even on sizable fines? Just under P/B 1 and earnings have been 20 DKK / year recently. I bought a small position today. Might be early, mostly to follow it and go in with size if uncertainty lifts and price remains here and/or there is a share issue much lower after hefty fines. I'm not necessarily long term invested. I read one analyst estimating the fines to be 3-5 BDKK, another up to 40 billion DKK (~5-6 billion USD).

 

NewbieD,

 

Yes, I agree with you on that separate matter about DANSKE.CPH. Report from management and board will be released Wednesday the coming week. It's important to understand, that the particular AML issue in Estonia is contained. The branch was simply closed down totally after the "wild party".

 

However, I'm not going get my tie squeezed in mailbox lid here [or, for that matter, any part of my body!], because of the wholly owned bank subsidiary, Realkredit Danmark A/S - the mortgage institution:

• I consider RKD materially undercapitalized,
  
• The debt mountain in Danish farming and agriculture [RKD a major player here], combined with
  
• The drought in this summer in Denmark ruining it for this industry already under severe pressure. The "party" has just started with two large bankruptcies within the last few weeks. The domino bricks have started toppling now.
  

[NewbieD]

Thanks for your sharing John, interesting views. I get I'm at a knowledge disadvantage here. Given time constraints I might have to give up on Danish banks, previous venture into DAB might be a hint 8)

 

I found this article, mentioning 8 BDKK in potential farmers losses. Not big compared to Danskes market cap? But I guess it depends on if you view more outcomes like this as likely the coming years.

 

https://www.reuters.com/article/us-agriculture-drought-denmark/danish-farmers-drought-losses-deepen-more-bankruptcies-seen-idUSKCN1L70TR

 

 

[John Hjorth]

Thank you, NewbieD, [ : - ) ]

 

The majority of Danish farmers don't use "traditional" acounting and/or audit firms, but have pooled their interests into professional associations, that provide such services to the members of such a given association.

 

Here is an example here from Funen : Patriotisk Selskab. [One of the oldest and largest, by the way - I think there are about ten of them in the country.]

 

One of the services provided to the members - it's really highly valued by the members - is that they do a lot of benchmarking down in so many operational details [based on standardized charts of accounts in the shared accounting systems] for each kind of farm, that states basis for operational consultancy services to each separate member to run the member farm more efficiently. [No "traditional" accounting or audit firm can compete with this.]

 

The interesting part is, that some of these associations aren't totally tight about the members finances.[To me, that's bordering to doing something illegal, so I suppose each member has specically agreed to this.]

 

Here [p. 33] is such a tiny window. [i know my fellow Scandinavian CoBF members can read it without problems.]

 

Now what do you see here?:

 

Enormous balance sheets, low earnings, low ROA, low ROE, lots of debt compared to earnings.

 

If you study the P/L in detail, what do you see then?:

 

Please note the EU-subsidies, and compare them to profit

Please note "Other business income" [Danish: "Andre erhverv"], which can be [examples]: Hunting fees, if you have forest on the farm, winter storage of RVs and boats, if you have storage capacity in the buildings on the farm in winters, other kinds of storage, put & take fees is you have a lake on the farm, B&B earnings if you have some rooms set up for "farm vacation" etc.

Please note "Private income" [Danish: "Private indtægter"]. That is income from work [wage or salary] other places that at the farm - for the farmer and the spouse [<-!]

 

If you adjust for that - what do you then see of earnings? [The EU-subsidies can naturally be discussed.] And it's a cyclical business.

 

In short: The stated equity in the tables is simply non-existent, because what you look at is just a treadmill, generating no real cash flow - actually it is draining you for money, energy and time [occupying - perhaps a major part - of your capacity to work and make money somewhere else] to keep it spinning. - So: Pure DFDS [<- not to be confused with DFDS.CPH!] - Danish Farming Derangement Syndrome.

 

Danish farmers must be an extinct species in the future, unless things change materially - if not for any other reason, then alone for the reason that they are up before sunrise every day, and most likely just pass out late in the night of fatique - every night, seven days a week, meaning no time or energy for reproduction ...

 

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-Perhaps I got carried away a bit here ... [ : - ) ]

[NewbieD]

That is not a wonderful business... This year the extra-curricular activities, so to speak, might not be able to hide sharply higher prices for fodder to the swine and there will be an outright loss. Any talk of the state supporting them?

On the other hand, I guess this is the same story for all of Europa with EU subisidies keeping farming alive. Certainly in France and Spain they get a lot of support.

 

Apparently Arla announced they will give all their profit (~300 million £) back to the farmers who are having a really tough time b/c of the drought. At least in Sweden many cows were slaughtered in the summer due to pastures not being able to support them. https://www.theguardian.com/business/2018/aug/30/arla-foods-dairy-cooperative-pay-2018-profit-europe-drought-hit-farmers

 

 

 

[John Hjorth]

I read that you get it, NewbieD, [ : - ) ]

 

I have nothing to add with regard to the rest of Europe, based on ignorance, unfortunately. [i have enough to think about with my own small Danish bank positions.]

 

It's not just bad business ... it's plain and simple folly, with participation of banks and mortgage institutions here. It's just soo lame. The total debt of agriculture and farming here in Denmark is north of DKK 350 B.

 

However, it seems like somebody has - at least - come to some kind of understanding of this, now talking about: "What do we do to avoid the gene pool of our future production basis not to end up in the slaugter house now?"

 

The Danish industry hasen't - so far - asked for public hand outs, only [interest free] deferred payments. They know, that they are politically really in the dog house already, because of pollution from production.

 

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Think of it, as if I was applying for a DKK 100 M margin line to buy Berkshire at Danske Bank. [i would do better with that than with any farm!]. I would sure hit the headlines in the local papers at any not further specified future point in time at the blowup!

[Spekulatius]

I would have to look into this a bit more and while I share some of Johns concern regarding the debt in the AG sector, in the EU (and elsewhere), the Farmers tendnto get bailed out or at least a collapse (from drought or other external) factors alleviate. I seriously doubt that Danish banks will suffer substantially, but I admit they I haven’t done enough research on it.

 

I think Danske is well worth looking into, as well as Lloyd (LYG) once it is clear how the Brits will exit out of the EU.

[John Hjorth]

Danske Bank A/S Company Announcement [september 19^th 2018]: Danske Bank A/S donates DKK 1.5 billion and revises outlook downwards.

Danske Bank A/S Company Announcement [september 19^th 2018]: Danske Bank's CEO resigns.

Danske Bank A/S Press Release [september 19^th 2018]: Findings of the investigations relating to Danske Bank's branch in Estonia.

 

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Full Bruhn & Hjejle Report here [<- Juicy reading stuff for the weekend to come!]

 

Edit:

 

I just read the key takeaways in the Executive Summary [section 1.4] ... Holy Molly! [0_0]

 

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Edit 2:

 

Bloomberg [september 19^th 2018]: Danske Chairman Says "Large" Part of USD 234 Billion Is Suspicious.

 

I really love the way the female reporter pronounces "Donske Bank", by the way! [ : - ) ]

[John Hjorth]

CORRECTIV - Researche für die Gesellschaft: Die CUM-EX-files - A cross-border investigation - Wie Banker, Anwälte und superreiche Europa ausrauben.

 

This basically started with what's called the "Dividend scandal" in Denmark, where the Danish IRS was embezzled for DKK 12.7 B, - minor cases in the Netherlands Belgium and Norway also.

 

Now this international consortium of 19 18 news media are continuing digging. I bet there is really fired up in the stowe for somebody here. The consortium already has a number of European banks by the balls here - C, JPM & MS are already mentioned by now in the European press media related to this as well.

 

Edit: Changed the Netherlands to Belgium.

Edit II : Fixed number of news media.

[Spekulatius]

Thanks for sharing above article, The scope of the fraud is true truly staggering and will be very expensive for the enables that are going to get caught. The EU has become much less forgiving to while collar fraud, tax evasion, and collaboration to stiff competition than in the past and the fines have become much much higher,

[John Hjorth]

Danmarks Radio: The men who robbed Europe. [46 minutes]

 

It's a pre-release documentary from DR, to be transmitted coming monday evening. [i've never seen such a "pre-release" from DR before, by the way.] The speaking voice and text is Danish, so unfortunately & most likely only my Scandinavian fellow board will be able to understand the whole transmission, but there are interviews in both German and English language contained in the transmission, so it may certainly be worth your time to watch anyway.

 

To me, this is a frontal attack on many major European banks, involving some banks outside Europe, too. I wonder if it's a time coordinated initiative, so there will be similar releases in the other involved European countries today, too.

 

I've never seen anything like this. The whole thing appears surrealistic, based on that all those banks consider themselves the pillars of the societies, serving their communities, and now appear to be caught in stealing from them. [<- I thought I was fully past naivity with banks by now, but I still thought it was the privilege of the customers of the banks to have that role! [ : - ) ]]

 

Most likely there will be lots of cheap European bank stocks for you to pick in the near future, Spekulatius. Think of all the institutional money invested in those banks, that now start yelling and rushing for the door.

[kab60]

It could very well have consequences, but one has to remember these are some really old cases. Same could be said about Danske Banks money laundering case, so not saying it won't have an effect, but a lot of the stuff is pretty well covered already.

 

This 2009 piece from The Guardian is epic: Roger the Dogder - £40m king of tax

 

https://www.theguardian.com/business/2009/mar/19/roger-allan-jenkins

[writser]

Potentially controversial: I think the story is a bit overhyped. At least for Germany (where the damage is supposed to be tens of billions) I'm not actually sure the cum-ex trades were actually illegal. AFAIK the German tax code was really outdated (i.e. did not account for shortselling, settled positions vs. unsettled positions, etc). People were exploiting this and it wasn't exactly a secret. From the Cum-Ex website:

 

The federal German government only called a stop to the practice in 2012 by making adjustments to the tax code, then making another adjustment in 2016 after one variant of the trade had continued. Its response had been so slow that a parliamentary inquiry was set up. Some critics think the finance ministry was fully aware of cum-ex all along but hesitated to close it down as it was one of the few profitable business lines of banks after the 2008 financial crisis.

 

I'll add to that: almost certainly the German tax department knew what was going on. You don't give away a few billion euros in tax refunds without noticing anything.

 

I'm not condoning the practice but is it really unlawful? I don't know. As long as certain market participants pay other dividend tax rates than others there will be strip trades / cum-ex trades and third parties will facilitate them. In a world where you can send money anywhere with a few mouse clicks any inefficiency in any tax regime will be exploited as long as it's not strictly illegal.

 

Everybody will be shouting "f**k the bankers" for a few months, maybe a few billion in fines will be doled out and somebody might even end up in jail. After that: business as usual.

[John Hjorth]

It actually is overhyped. Somehow, it's lobbyism and populism amalgated - coordinated by 18 European news media - perhaps creating opportunities for bank investors.

 

kab60 is also right - some of it is actually old stuff.

 

Switzerland:

 

Republik [October 18^th 2018] : Das müssen Sie zu den Cum-Ex-Files wissen [outlined].

 

Germany:

 

Handelsblatt [October 18^th 2018] : Special - Wie banken in die steuerkasse griffen.

Süddeutsche Zeitung : Cum-Ex-Aktiengeschäfte - Dividendenstripping.

Zeit [October 18^th 2018] : Thema - Cum-Ex.

Tagesschau [October 18^th 2018] : CUM-EX - NACHRICHTEN UND THEMEN.MEN

[SharperDingaan]

You might want to think along more 'predatory' lines....

 

Assume that regulation/oversight of European banking is 'more-or-less' co-ordinated. While execution in each country will be along national lines, 'overall' execution follows a 'plan'. As with an orchestra, individual sections (countries) all following the conductor - to produce great music. The great recession was only 2006/7, we're finally recovering from it, and a lot of the cause was banking related (ie: LIBOR, instiutional corruption, etc). Arguably we're now at the stage where 'the system' is healthy enough, that reforms can be implemented without killing the patients. All banks down, as the tide goes out.

 

UK banks were amongst the worst offenders, and the UK has the additional problem of the pending Brexit. Most would assume that a 'managed devaluation' and a BoE temporary 'put' on the UK banking sector would be part of the exit plan. A european buying a UK bank buys cheap as the tide receeds, buys cheaper as Brexit complicates, and gets both a devaluation boost and downside protection from the put - not available anywhere else in Europe.

 

And as capital shifts from Europe to the UK, the cracks around the European banks progressively begin to show more ...

So as a European, why wouldn't I help myself  ;D

 

SD

 

 

 

[John Hjorth]

How is it, that I'm not surprised to see SharperDingaan catching at least some interest here? [ : - ) ]

 

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Danmarks Radio - News - Money [index page][today] <- It's just all over the page today!

 

Especially this one is entertaining: The bloodsucking Australian vampire-kangaroo is already known for its unfinished business with the Danish IRS.

 

Background information:

 

Macquarie took TDC A/S private together with three Danish pension funds earlier this year. [Name change from Macquarie to BAVK soon?][<- I coulden't help it here.]

Now TDC board members from the pension funds are asking questions about if there are dirty money in TDC.

Leftist Danish MPs are now yelling on Twitter that they want a Danish state bank. lol.

 

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Earlier this week Mr. Browder reported Nordea Bank AB to the Danish and Swedish police, because he has found evidence that some of the money related to the Magnitsky case has been funneled through Nordea, too.

 

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Poor all those Danish semi-lazy business reporters doing overtime for once sake - up to a weekend - to keep up.

[rb]

The problem with the European banks is that they're crap and full of risk. The white collar crime sprinkled on top is not as much of an issue. Even with the huge fines that the EU likes to slap. It wouldn't be much of an issue.

 

But the banks aren't earning well on their assets. Europe is over banked, there's huge competition that will keep margins low. Then there is the risk. I don't like owning banks in countries with huge household debt. That's pretty much a disaster waiting to happen. So that group of countries takes out Ireland, UK, Sweden, Denmark. Germany doesn't have large household debt but doesn't really have banks to buy either. France is actually good. Italy doesn't have huge household debt but the country is a basket case.

 

That brings us to the next issue. Systemic risk. Banks in Europe is very intertwined and you have very large Pan European banks. Let's say that the Italian government does something stupid which kneecaps Unicredit. SocGen, through no fault of their own, is in the crapper before the end of the day.

 

How can you invest in such an environment?

[SharperDingaan]

You're really betting AGAINST the intertwining of the european banking system.

Day-1; somebody, somewhere, screws up - all the banks go in the crapper, and media transmission accelerates contagion. Day-2; locals read about 'their' banks fall in their morning paper/media feed, and react accordingly. By end of day-3, the central bank in the 'source' market is actively intervening - & we're all speculating on how successfull that intervention may be.

 

We learnt from 2006/2007 that if the bank is still solvent by early afternoon on day-2, it's probably going to survive the screw-up. So an enterprising lad would buy calls in the early afternoon of day-2, dump them at the end of the week, and margin the gain against a long position (held untill record date) to capture the dividend as well. The expectation being that to avoid an immediate collapse, the central-bank will temporarily repo enough junk out of the offender, that it can ensure a demonstration of 'confidence to the market' - via full payment of the next round of dividends.

 

Thereafter it's just sit in T-Bills, until the next screw up shows up.

Obviously the more players, and the more unique constraints there are, the more opportunities ;)

Hence predatory investing in Europe.

 

SD

 

[John Hjorth]

I look forward to read about you being in action here, SharperDingaan. [ : - ) ]

 

Edit: I still think, after perhaps a couple of years, perhaps more, that your former avatar fit you better here on CoBF. [ : - ) ]

[Spekulatius]

I don’t think banks are going to crash in Europe, it’s more like a slow motion train wreck. The biggest problem are not bad assets, it’s lack of profits. A bank with a 2% or less NIM just doesn’t work very well, but they is what most banks have to content isn’t in Europe. it’s the same with some savings and loans, they can survive, but they can’t proper. the exception seems to be LLoyd (LYG) which has a NIM close to 3%. that extra 1% is a 50% higher margin than with a 2%NIm bank, which makes all the dollar difference in the world. Of course Britain is very likely going to see a hard Brexit and possibly a recession and after that, banking in London won’t be the same again, IMO.

 

On rule I live by is they buying a bank stock is always a bet on the home region/ country economy. If the local economy/ country is not going to do well, the bank won’t do well either, even if it’s well managed.

 

I think UBS is a differnt  case, because it is 50% global asset manager, 25% Swiss bank and 25% investment bank, it should be less dependent on local macro than most other banks in Europe.

[petec]

In that case you want to worry FAR more about Jeremy Corbyn’s Labour Party than you do about Brexit.

[John Hjorth]

In that case you want to worry FAR more about Jeremy Corbyn’s Labour Party than you do about Brexit.

 

Pete, you can't hide your nationality! [ : - ) ]

[SharperDingaan]

I look forward to read about you being in action here, SharperDingaan. [ : - ) ]

 

Edit: I still think, after perhaps a couple of years, perhaps more, that your former avatar fit you better here on CoBF. [ : - ) ]

 

The old one was just a 'tourist' Zulu chief - but I do like his head-dress!

The current one is Oliver Reed who played 'Athos' in the 1973 film version of the Alexanda Dumas book 'The Three Musketeers'. A bit more appealing in todays investment rough and tumble! https://www.imdb.com/name/nm0001657/?ref_=ttfc_fc_cl_t1

 

SD

 

 

 

[petec]

In that case you want to worry FAR more about Jeremy Corbyn’s Labour Party than you do about Brexit.

 

Pete, you can't hide your nationality! [ : - ) ]

 

I’m not trying to. I’m just pointing out that the economic risk in the U.K. is not Brexit, it’s the very real possibility that our next Chancellor (finance minister) is a self described Marxist with Maoist sympathies.

[Spekulatius]

In that case you want to worry FAR more about Jeremy Corbyn’s Labour Party than you do about Brexit.

 

Pete, you can't hide your nationality! [ : - ) ]

 

I’m not trying to. I’m just pointing out that the economic risk in the U.K. is not Brexit, it’s the very real possibility that our next Chancellor (finance minister) is a self described Marxist with Maoist sympathies.

 

Possibly true. In any way, I will stay clear of U.K. stocks until this is cleared up. I own some Anglo US utility stocks  PPL and NGG and I have heard this flares about nationalization, which from my perspective isn’t a problem, as long as shareholders are fairly compensated. I do recall the nationalization of French banks in the early 80’s, but shareholders then were fairly compensated in thet case, so from my perspective as an investor, it’s not a problem.

 

As far as Brexit, I am sure in the long run, Britain will be fine, but it could be a tough 5 years after the Brexit occurs. I also think that London’s role as a financial center will be significantly diminished, but even that may be better for the UK in the long run.

[John Hjorth]

BCS down from YTD high ~12.45 in mid April 2018 to now ~8.38.

LYG down from YTD high ~4.19 in end January 2018 to now ~2.94.

 

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GlobalCapital - Casper Cox [November 20^th 2018]: BoE brings forward stress test results ahead of Brexit vote.

Bank of England - Upcoming publications : November 2018 Financial Stability Report and Stress Test results will be published on 28 November 2018 at 07:00.

 

Publication brought forward because of the UK Parlament Brexit vote on the Brexit deal negotiated by Ms. Theresa May with EU in the last weekend.